End the Corporate Shell Games

Leslie Caldwell
NOV 30, 2016

Leaders from around the globe will converge Thursday in Panama City to discuss the next steps in the international fight against corruption.

That meeting will highlight for the world — and for our newly elected president and Congress — that the U.S. is in danger of falling behind our global partners in preventing the flow of illicit money through our financial markets. We have failed to enact legislation that would require the disclosure of the people behind legal entities — legislation that would assist law enforcement in stopping those who corrupt the U.S. and international financial systems.

It is no secret that the U.S. financial system is an attractive playground: We have the deepest, most liquid and most stable markets, and criminals seek to use the tools of our financial and banking systems to serve their illicit purposes. For an illegal enterprise to succeed, criminals must be able to hide, move and get access to their proceeds without detection. And when they are successful, their actions serve as a dual threat: Their criminal conduct itself can threaten the safety and security of all citizens, and their use of the financial and banking systems to hide their gains — or to fund additional criminal conduct — undermines the integrity of those systems.

One prominent example is a case the Justice Department filed seeking to forfeit and recover more than $1.2 billion in assets that were involved in, or traceable to, an international conspiracy to launder funds stolen from the people of Malaysia. The government of Malaysia wholly owns 1Malaysia Development Bhd., a strategic investment and development fund. As alleged in the complaint, over a six-year period, 1MDB associates took more than $3.5 billion from the development fund to purchase luxury condominiums, a $35 million jet, expensive works of art and a motion picture company that used the money to finance, among other things, the production of “The Wolf of Wall Street.”

According to our allegations, the 1MDB associates were able to successfully divert funds meant to assist the Malaysian people by providing false information to banks about the ownership of the accounts opened to facilitate their criminal activity. The 1MDB case is just the latest illustration of a global problem arising from the ability of individuals and criminal organizations to use shell companies to conceal the proceeds of crime. Gaps in legal regimes around the globe allow anyone with a basic level of sophistication to create accounts in the names of shell entities and avoid disclosing their beneficial owners of those accounts. Through cooperation and assistance from our international partners, investigators were able to lift that shroud and identify the true identity of the beneficial owners in the 1MDB case. However, that can be a time-consuming and resource-intensive process based on extensive document searches and witness interviews. In many cases, it can take years to break through these barriers, if we succeed at all.

As it stands, owners of shell companies — including criminal actors — can effectively shield their true identity: The U.S. does not require corporate entities to disclose their true owners to the government. Corrupt foreign officials and other criminals are well aware of this loophole and exploit it, for example, to purchase expensive assets, such as real estate, here in the U.S. As a result, we see the movement of billions of dollars — some of which represents proceeds of corruption or other crimes — through shell companies around the world. Whether an individual’s decision to use a shell company is motivated by corruption, tax evasion or a legitimate investment strategy, the end result is a lack of financial transparency. This lack of transparency is precisely what makes the U.S. attractive to criminals, including corrupt foreign officials, who seek to use the financial systems to hide their assets.

Fortunately, there is a straightforward remedy.

In May, President Barack Obama’s administration took several important steps to combat illicit finance and corruption. First, the U.S. issued a rule which, among other obligations, requires U.S. financial institutions to verify the identity of the person who owns, controls and profits from a company. Second, the administration sent proposed legislation to Congress that would require companies formed within the U.S. to know and report beneficial ownership information at the time of the company’s creation to the Treasury Department and face penalties if they fail to comply. By requiring the disclosure of beneficial ownership information at two important points– at account opening and company formation — the U.S. will significantly reduce the ability of criminals to hide their identity, launder funds and use U.S. companies to conceal illegal overseas activities. Finally, the administration also sent to Congress proposed legislation designed to enhance our ability to combat transnational corruption. This legislation would assist investigators and prosecutors in gathering evidence essential to unraveling the string of transactions employed by those who seek to hide illicit funds.

The European Union has passed beneficial ownership legislation, which will require member states to implement it by 2017. Once this happens, the U.S. will have fallen behind our international partners in our ability to effectively investigate and put an end to these schemes.

Members of Congress recognize the importance of this issue, and we have had substantive discussions with them about how to move forward with legislation that strikes an appropriate balance between the need to collect beneficial ownership information and the privacy concerns that the business community has raised. If legislation is not enacted before Congress adjourns, this must be a high priority for the next Congress.

The U.S. must close the loopholes exploited by corrupt foreign officials and others seeking to hide the profits of their illegal activity, and assist law enforcement in preventing and investigating financial crimes. This action is necessary to keep the U.S. at the forefront of the international efforts to combat transnational financial crimes and to prevent it from being a haven for criminals and their looted assets.

This is not a matter only of theoretical importance: A flood of looted assets distorts markets, exacerbates income inequality, and enhances the sense of impunity already held by criminals and kleptocrats.

The U.S. should be a leader in finding solutions, rather than part of the problem.

Leslie Caldwell is assistant attorney-general for the Justice Department’s criminal division.

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